PG&E Corp (PCG) 2009 Q2 法說會逐字稿

Good morning and welcome to the PG&E second quarter earnings conference call.

At this time, I would like to introduce your host, Gabe Togneri.

Thank you and have a good conference.

You may proceed Mr.

Togneri.

Good morning, everyone, we appreciate your interest in PG&E and today's call.

We issued our earnings release earlier today and as usual, it's posted on the website, along with the supplemental tables, including the Regulation G reconciliation.

The same information can also be found in an 8-K report that we furnished to the SEC and we'll also file our joint form 10Q report for PG&E Corporation and Pacific Gas and Electric Company today.

A replay of the conference call will be available from our website and our prepared remarks and the Q&A session to follow as usual contain forward looking statements based on assumptions and expectations reflecting information currently available to management.

As we discussed in more detail in the press release, and SEC reports, actual reports may differ materially from those forward looking statements.

Important factors that can affect our actual results are described in those reports we filed with the SEC.

Those factors include the risk factors and other factors described in our annual report on form 10K for the year ended December 31, 2008 and our form 10Q reports.

We always encourage you to review those factors.

Leading the discussion today will be Peter Darbee, Chairman, CEO and President of PG&E Corporation, Chris Johns, President of Pacific Gas and Electric Company, and Kent Harvey, CFO of PG&E Corporation.

Jack Keenan, our Chief Operating Officer and other key members of the team are also here and can participate in the Q&A session.

Now, I'll turn things over to Peter Darbee.

Thanks, Gabe, and thank you all for joining us today.

We're posting solid results from the second quarter with earnings from operations coming in at $0.83.

We remain on track to achieve our guidance for 2009, 2010 and 2011.

The foundation of our investment case continues to be a substantial capital expenditure plan together with manageable financing requirements and constructive regulation.

Last month, we submitted our notice of intent for the 2011 general rate case to the consumer division of the CPUC, and just a few days ago, we made our next transmission owner filing with the FERC.

The plans outlined in these filings remain consistent with our goals to provide safe and reliable service to our customers.

This requires substantial investments to replace aging infrastructure as well as systems upgrades to accommodate new technology.

We also remain focused on operational excellence, both in our day to day operations and in managing our major long term projects.

We see a direct link between this focus and our ability to deliver for you, our shareholders.

Last month, we promoted two highly experienced members of our senior management team, Chris Johns to President of Pacific Gas and Electric Company and Kent Harvey to CFO of PG&E Corporation.

Their promotions demonstrate to shareholders our continued strong commitment to deliver our value proposition.

Chris has proven himself to be an excellent leader who knows how to deliver results.

Kent is coming back to finance in the broader role, having previously served as CFO with the Utility, Kent brings to the organization an invaluable breadth of experience and expertise in financial management, as well as, in investor relations.

The appointments of Chris and Kent to critical positions at PG&E are timely because this is a time of unprecedented change in our sector.

These appointments will allow me to devote more time to longer term issues important to PG&E and our industry, especially as our country moves in new directions on energy and the environment.

We see opportunities involving renewable energy and the transmission that will deliver this energy.

We believe that the technology of the Smart Grid will be able to integrate communications throughout the country's energy infrastructure and give customers cleaner more reliable and more flexible energy services.

Smart Grid also paves the way for advancements like plug-in electric vehicles and distributed energy resources.

My focus will be to ensure that PG&E is positioned to take advantage of these and other new growth opportunities as they arise.

We have also historically taken a leadership role in policy development, particularly as it concerns the environment.

Both federal and state governments are giving increased attention to energy policy legislation.

This is an area where I'll remain active, focusing on shaping national and regional policy that impacts our shareholders and our customers.

Now, I'd like to turn it over to Chris.

Thank you, Peter.

Before I cover our operational accomplishments during the quarter, I want to talk briefly about my new role at PG&E.

For the past several years, I've seen a drive for excellence throughout our team and a commitment to making PG&E the leading utility in the country.

Our focus on operational excellence has helped us make substantial progress in delivering for our customers, employees and shareholders.

We still have some work to do, and I intend to continue to lead that progress forward.

Our Smart Meter Program is a great example of excellence in operations.

We're installing this new technology at a pace of 12,000 meters per day, and last month we installed our 3 millionth SmartMeter.

The transition to the new upgraded technology has gone well.

We've installed more advanced meters than any other utility in the nation.

We continue to remain on track to hook up ten million meters for all of our customers by the end of 2011.

Our two new baseload generating projects, Colusa and Humboldt, are moving forward according to plan.

At Colusa, we've developed and completed much of the framework for the natural gas turbines and advanced cooling fans.

At Humboldt, we are working on the foundation and will start the framework shortly.

We expect both these new highly efficient plants to be online in 2010.

The GRC filing that we previewed last month will allow us to continue to invest in our infrastructure so we can meet our customers expectations for safe and reliable service.

This work creates thousands of jobs in various companies and industries, at a time when jobs in California are urgently needed.

The California economy has been making headlines nationally, both with the unemployment rate, as well as the debate on how to balance the state budget.

While lawmakers were hammering out details for three weeks in July, the state issued warrants.

Fortunately, a budget was formalized and signed by the governor before the end of the month and normal payment terms will now resume.

The warrants we received in July, which totaled about $4.8 million will be payable in October with interest.

The economy continues to affect our customers.

Our electric sales declined by a little over 1% compared to the first six months of last year when adjusted for weather and meter reading days.

Our forecast indicate a decline in sales of about 1% for the entire year compared to the previous year.

As you know, decoupling protects our revenues from fluctuations in sales.

California currently has three times more foreclosures than the national average.

And unemployment rates remain high.

We're supporting our customers during this difficult time through our customer assistance programs.

We've recently expanded our outreach efforts to increase awareness of these programs and have simplified program enrollment resulting in increased participation.

This quarter alone, over 100,000 eligible customers have been identified and enrolled in our programs through these efforts.

We're helping our business customers reduce their energy bills through low cost or no cost energy efficiency options.

Furthermore, we're continuing to work together with our business customers to help them manage credit issues during this difficult time.

We've also shortened our collection cycle to be in line with regulatory guidelines.

These actions are all consistent with what we discussed with you during our first quarter call.

And they've helped us to effectively reduce the level of uncollectible expense we saw earlier this year.

As a result, our write-offs for this quarter were generally in line with the second quarter last year, and approximately $6 million less than the first quarter of this year.

We're encouraged by our success so far.

However, given the current economic outlook, we realize we must remain aggressive with our mitigation efforts in order to maintain this momentum.

With that, I'll turn it over to Kent Harvey.

Thanks, Chris.

Good morning, everyone.

Before I get started with this quarter's financial results, I want to say how pleased I am to return to working in Finance and interacting with all of you in the financial community.

I'm looking forward to reconnecting with many of you and getting to know those of you I haven't worked with before.

As we reported earlier this morning for the second quarter, PG&E Corporation earned $315 million dollars or $0.83 per diluted common share in earnings from operations.

On a GAAP basis, we earned $388 million, where $1.02 per diluted common share.

This compares with $293 million or $0.80 per diluted share for the second quarter of last year.

And that's on both the GAAP and non-GAAP basis.

As laid out in table four of our supplemental earnings package, earnings from operations this quarter reflect an increase of $0.06 per share relative to 2008, as a result the revenues associated with higher authorized rate base investments.

This comes from the increase in our PUC authorized revenues as well as our FERC authorized revenues for electric transmission.

We had a number of items that combined to make up $0.02 positive in miscellaneous.

Principally this reflects gains in our non-pension benefit trusts, as a result of equity market performance.

It's really a reversal of the negative impact that we saw during the first quarter.

On the flip side, costs accrued for environmental remediation work resulted in a negative $0.02 impact to EPS.

Based on the results of an environmental assessment completed during the quarter, we increased our estimate of future remediation costs at a former utility power plant.

We also saw a $0.03 negative impact from share dilution, and I'll have more to say about this later on when I cover our financing activities.

I wanted to take a minute to update you on the three items impacting comparability that we outlined earlier this year.

In April we received PUC approval for recovery of amounts spent valuing our hydro facilities for possible divestiture at the beginning of the decade.

This recovery resulted in a $0.07 positive impact to GAAP earnings.

Also, during the second quarter we received IRS approval for the tax refund that we had identified as an item impacting comparability for 2009.

This had a positive impact to our GAAP earnings of $0.15.

The third item impacting comparability is the accelerated gas system and integrity surveys and associated maintenance work.

This project had a $0.03 negative impact on GAAP earnings during the quarter, but it's been ramping up and is expected to result in a larger impact to GAAP earnings in the second half of the year.

We expect that the net effect of all three items impacting comparability will add between $0.06 and $0.08 to GAAP EPS for 2009.

As Peter indicated, we're reaffirming our guidance for 2009, 2010 and 2011.

We have two solid quarters behind us.

Although, there were items that affected us negatively, such as the uncollectibles we experienced in the first quarter and the environmental remediation cost in the second quarter.

I believe, we've responded well to these items and have put in place plans to achieve our 2009 guidance.

For example, Chris already talked about our second quarter success in mitigating the impact of uncollectibles which negatively affected us in Q1.

We'll continue to focus on that for the remainder of the year.

On last quarter's call, we also mentioned the efforts we had initiated to tighten our belts.

We have completed that reprioritization and we expect most of those benefits to occur in the second half of the year.

In addition, our electric transmission revenues tend to rise in the third quarter compared to the first two quarters due to increased usage in the summer.

That should be a positive in the second half of the year because the FERC revenues are outside of the decoupling mechanism.

Finally, we're also expecting decisions on some of our ongoing regulatory items before yearend, such as the Core Procurement Incentive Mechanism or CPIM and our energy efficiency incentive revenues.

These should have a favorable impact as well in the second half of the year.

In terms of the financing activities on the debt side, we issued 500 million of floating rate short-term notes in June to support the collateral requirements of our electric procurement and hedging program.

And then on the equity side, we issued $193 million of common stock through our 401K and DRIPP programs during the first two quarters of the year.

This level issuance was higher than we would normally experience, roughly double, and it resulted in a bit more dilution than we would have expected.

We'll continue to monitor the programs and we do plan to shut off new issuances in these programs during some periods in order to manage our equity going-forward.

However, because of the success of the programs to date, and in conjunction with our other positive cash items, we can now say that we do not expect to need to issue new blocks of equity outside of the 401K, and DRIPP programs through 2010.

Obviously, this outlook is based on our current approved CapEx program, and if we increase the size of our CapEx then our financing needs would also increase.

On the regulatory side as Peter and Chris mentioned, we submitted a notice of intent in our upcoming general rate case, covering 2011, 2012 and 2013.

Our guidance is consistent with the GRC filing.

We plan to request a $1.069 billion revenue increase for our business in 2011, which on a stand-alone basis would represent a 6.5% increase over our 2010 revenue forecast.

However, when we combine our GRC with all other anticipated rate changes, we estimate that the overall electric rate impact on January 1, 2011 will be less than 1%.

This assumes among other things the current forward curve for natural gas prices and its impact on power prices.

Our GRC request reflects an annual average capital expenditure level of $2.7 billion in 2011, 2012 and 2013 for investments in gas and electric distribution, as well as electric generation.

Our formal GRC application will be filed in December, and we hope to have a final decision by the end of 2010 for rates effective January 1, 2011.

Last week as Peter mentioned, we filed our transmission owner 12K's with the FERC, requesting an incremental $170 million in total revenues.

As I think you know, our TO filings are driven primarily by electric transmission Cap Ex program, which includes projects to increase capacity, as well as planned replacement of equipment.

Now, I'll turn it back over to Peter for some concluding remarks.

Thanks, Kent.

As I mentioned in my opening comments, policy makers have substantially increased their focus on improving our country's future energy plans.

PG&E is frequently called on to provide input on these matters and we look forward to continuing to work with policy makers both regionally and nationally.

One element of this focus is the Waxman Markey Bill.

I learned a long time ago not to handicap political decisions, so I won't offer a prediction on the passage of this bill.

We're actively involved in providing constructive feedback as the bill moves through the Senate.

We've been a proponent of controls over emissions and the fair allocation of credits for some time.

On the state level, we have been carefully following proposed legislation that would mandate a 33% renewable portfolio standard.

We believe there are a number of key items that must be addressed to make the 33% RPS goal by 2020 achievable, including expanding the eligibility of renewable resources, compliance flexibility and the use of renewable energy credits.

We're fully aligned with our customers and policy makers in supporting the expansion of renewable energy and are committed to helping resolve the challenges surrounding renewable energy.

One of the most significant challenges we see is permitting and siting of transmission.

We hope to continue to work constructively with the state and federal governments to streamline this process.

I want to close by pointing out one other highlight of our business.

This is a topic which we don't often discuss with shareholders.

Specifically, diversity and inclusion have long been hallmarks of PG&E's heritage of values and our commitment has been widely recognized over the years.

Recently, we were again named one of the 40 best companies for diversity by Black Enterprise magazine.

Our customer base is very diverse and we reflect this diversity through our employees, senior management team and board of directors.

It makes us a better company.

This honor from Black Enterprise magazine acknowledges the value we place on diversity in our culture.

It is one of the principle values that help us reach our goals.

And with that, I'll close and we'll now open it up for questions.

Certainly.

We will now have the question-and-answer session.

(Operator Instructions).

Our first question comes from the line of Greg Gordon with Morgan Stanley.

You may proceed.

Thank you.

Good morning.

Kent.

Welcome back.

Thank you, Greg.

A couple questions, first I hopped on a little bit late, I caught the tail end of your commentary on equity issuance.

Could you review that again for me, please.

What I essentially covered was that our equity issuance through our DRIPP and 401K programs continued at a fairly high pace, so far this year, and so we've issued at about twice the rate we would have normally expected.

As a result, we will be planning in future periods to shut off those programs, essentially supplying the needs for the programs through external purchases and not issuing net shares.

And because of the issuance we've done to date, because of the earlier debt financing at the corporation level and the equity infusion that was made into the utility and because our strong cash flow through our tax refunds and otherwise, we don't expect to need to issue any new block equity outside of the normal 401K or DRIPP programs through 2010.

So you would continue to have a normal, what you would consider a normal level of shares through the DRIPP, or would you be using open market purchases to satisfy the DRIPP?

We're going to be potentially at periods doing both.

We have the ability to go back and forth and manage our equity issuance.

Okay.

Obviously there's some restrictions on doing that, but within the restrictions we have sufficient flexibility.

And what is the weighted average share count?

We haven't provided that.

Okay.

It was 368 at the end of the second quarter.

I presume the shares outstanding at the end of the quarter were somewhat higher than that?

That would probably be true.

We have a fairly complex share calculation because of the two class method, so you really can back into that by looking at the financials, I think.

I'll talk to you offline about it, thanks.

The second question is, can you review where things stand in terms of resolving the controversy surrounding the energy efficiency incentive payment mechanism?

Greg, this is Chris.

We continue to move forward on that issue.

We have actually done a joint filing with Sempra to try to put in place an agreement, a settlement agreement, on how they would resolve that.

We still anticipate that we'll get an order by the end of this year that would allow us to resolve 2008.

Then, we would have in 2010 something in place that would allow us to address the hold back that is done for last year, and then the hold back that will be in place for this year.

We still believe that that's moving along.

We won't hear about it until probably the fourth quarter of this year.

But there is an assumption built into your guidance range for the outcome of that proceeding?

Yes.

We've said all along, it's zero to 30 million.

Okay, great.

Final question, is more for Peter.

I think one of the things investors generally get concerned about when they think about buying stock is just while it doesn't look like the overall economic malaise in California has really directly affected your ability to execute your business plan.

I think, people find it kind of hard to get their minds around how that won't ultimately impact your ability to grow and/or achieve your financial aspirations.

Can you talk about what the appetite is at the Commission for continuing to allow you to invest in infrastructure and sort of try to frame for people what your exposures are to the economy?

Direct or indirect?

Sure.

Let me cite a couple data points to provide guidance.

You may recall that Edison recently had a rate case, and that provided for a very significant increase in capital expenditures.

And what you see is that the size of what we're proposing in terms of capital expenditure increases are on a par with what Edison proposed.

You'll also see in looking at the Edison situation that they had a satisfactory, from their perspective, a resolution of the rate case, and so I think Edison has gone ahead of us in this process and come out of the commission with a satisfactory resolution of their rate case.

I have spoken with people at Edison and said, was it the case that your rate case was so far progressed that when the financial downturn occurred and crisis occurred, that really there was it so much momentum in your rate case that it was too late to impact it?

And the response back was no, the financial crisis did have significant impact on how that case was resolved, but in the end, they resolved it satisfactorily.

When you think about the timing of our rate case process, we'll be filing and then it will be resolved at the end of 2010, the beginning of 2011.

Our own belief is by that time the economy will have turned around at that point.

And so we will have been through the trough and be on the improving side, and with the expectation that we'll come through a rate case process very seely.

Now, what I would say in addition to that is that the commission continues to see the need, and I think policy makers continue to see the need to invest in our infrastructure in California.

There's certainly been a lot of enthusiasm for the Smart Grid, and remaining a leader in that regard, there's been continued enthusiasm for renewable deployment as well as energy efficiency.

So while we're cautious and we're sensitive to what's happening in the economy, I think people will take the long term view of what's right and continue the growth of PG&E and what is required for our customers.

So, I think that that is a factor.

The other thing is, we have been a beneficiary of reduced natural gas prices.

As we look at the rate outlook going-forward, it seems moderate.

That's the way we're looking at it, but we're sensitive in keeping an eye on that very question.

Thank you.

Thank you, Mr.

Gordon.

Our next question comes from the line of Daniel Eggers with Credit Suisse.

You may proceed.

Good morning.

Can we just talk a little bit about where you guys are going to fall out this year for hitting renewable energy mix relative to state standards and developments on some of these commitments to build, whether they're making any more progress than the slow work in solar you've seen so far?

Dan, this is Chris, I'll start out.

As you know, we have signed contracts and delivery for about 14% of renewable portfolio right now.

The contracts that we have signed -- those are the ones delivering.

We have contracts in place for over 20% of our need, which would put us in compliance.

There is concern, though, with that percentage that is not delivering yet that we've got contracts for as to their ability to get permitting, some of their ability to get transmission hookups and some of their ability to get financing in this current economy, and we've been talking about that, you know, obviously for the last six or 12 months.

And because of that, we continue to push really hard to sign more contracts and we've pushed, as you've seen, to look at our own opportunities to own some renewable generations.

For instance, we're going to already start a pilot project later this month building a system right next to one our substations for a couple megawatts and start that process.

You know that we are in front of the CPUC asking for permission to build 250 megawatts in a plan over the next several years, and we expect the commission to rule on that later this year or early next year time frame.

In addition to that, we continue to pursue opportunities to own larger installations of either wind or solar.

And we continue to look at those.

So all in all, we understand in this economy it's rough, and it will be challenging, especially around some of the issues on transmission and financing.

But we remain committed to doing all we can to meet the standards in the spirit of what California would like to obtain.

Are you seeing more opportunity and more interest for you guys to partner into some of these projects on a rate-based perspective?

If you think about maybe $2 billion of the loan guarantee money being stripped away for another clunker's program.

Does that open up more of a window for you guys to get involved in this front?

Well, I will say that we definitely have seen an uptick in interest of folks calling us and asking us about our interest in either supplying tax equity capital or being part a partnership, or looking at a build and transfer kind situation, and we're exploring those.

As we've said, we are interested in being owners, depending on the technology and economics around the projects.

As we've talked about before, you won't see a grand plan around those.

As we find opportunities that are valuable for our customers and shareholders, we're present them to the CPUC on a one at a time basis.

On the GRC itself, the December filing, was -- how did you guys come to that date versus maybe doing a little earlier, it seems like California's had a bit of a hard time getting things done in 12 months, given some your peers.

Is there any motivation, or what was the process, I guess for --

This is Chris Warner.

That date is in accordance with what's called the rate case plan, it's a phasing of the rate cases for the various utilities in the state set by the CPUC, that schedule is one that the Public Utilities Commission sets for us.

And I guess one last question on the ROE reset or the potential to adjust the ROE for higher debt rates, where are spreads in your bonds on a tracking basis?

On the A and the triple-B range and when are we going to hear some clarity from you guys on what you plan to file for?

This is Kent.

And as you know, the mechanism has been setup for single-A as well as Baa and we're in a situation where we're split rated.

There's a little bit of a lack of clarity about how that would work out at the PUC.

If you look at the Baa rates which we would focus on, they have been to date above the trigger mechanism, and although, they've been declining in recent months, it's a 12 month average.

Our current intention would be to make an advice filing in October, requesting an increase in our ROE to reflect the trigger mechanism, and it would be based on the B double A bond yield index.

That willing be based on the triggering event baked into the cost of capital mechanism.

Obviously we plan to be pragmatic about it when it comes to the filing and we're going to consider all of our options out there to make sure that we do what's in the best interest of our customers and shareholders.

Just to make sure I understand.

You guys, the increase may suggest a certain level of ROE bump, you guys have the discretion to ask for nothing or ask for less than the full adjustment if you're so inclined?

That's true, the mechanism is an advice letter file writing it's supposed to be fairly mechanical.

Okay.

How -- where is that average to date on your bonds if you look at the Baa or on the A side.

I guess we have about ten months or so under our belt, and if you looked at where you were cumulatively, I believe we're just slightly under 8% to date, and the trigger mechanism is at about six and a quarter I believe.

So the difference is about 1.6, 1.7% so the mechanism says that you would adjust by half that amount which would be somewhere in the 80 basis point range or so.

That's on the Baa side.

That's on the Baa side, yeah.

You wouldn't hit the trigger on the single A.

Thank you, Mr.

Eggers.

Our next question comes from the line of Ashar Khan with Incremental Capital.

You may proceed.

Good morning and congrats, Kent.

I was wondering if you could help us along, because in the first half the earnings growth has been a little bit sluggish.

You said you're going to make it up in the second half.

What are the factors.

I guess you were talking about some them, less on collectibles.

Could you specify then with how the growth rate picks up in the second half of the year?

If you look at our earnings for the first half of the year, obviously, we're a little shy, if you multiply by two, we would be a little shy of $3.00.

So to get up to our guidance, would really reflect kind of the following factors.

First, we did have a little hit in the first quarter from our uncollectibles, so you mentioned that.

I also mentioned the fact that we had worked over the past quarter on some belt tightening, and we think that that will pay off in the second half of the year.

The third item is just kind of the seasonal impact of our transmission revenues, which tend to be higher in the 3rd quarter in particular, when you have warmer weather, and, therefore, higher throughput, and again, electric transmission revenues are not part of the decoupling so that would flow through to our earnings.

And then I also mentioned that toward the end of the year we expect resolution of some of our regular regulatory items, and that would include our core incentive mechanism for our gas procurement as well as our customer energy efficiency incentives.

Those would be the factors I would outline to think about the second half of the year.

And Kent, based on -- you still have rate ranges for next year and 2010 and 2011, based on what you have filed and what is in there, where do you stand with the new rate case.

Where do you stand on those ranges, could you help us?

How do you get to the upper end or to the average?

Or how should we look at it?

We did provide ranges in the original guidance for electric distribution and transmission, essentially our GRC capital expenditures.

And if you look at our general rate case filing, or Notice of Intent anyway at this point, the CapEx numbers that I described which average 2.7 billion per year would be at the upper end of the range that we provided in the original guidance.

On the electric transmission side, I think we just provided an overall estimate, which was around 800 million, and our TO filing that we made quite recently with a tad north of the 800 million, very consistent with that level.

Okay, so if everything gets approved then we would be at the higher end of those ranges provided for the guidance.

For the rate case portions.

Okay.

This is Gabe.

You might recall at our investor conference that we not only gave a range for the categories of spend covered by the GRC, but we also identified the Cornerstone project as a potential incremental CapEx as well as the solar PV investment.

And so those are also part of the CapEx spend that would get us toward the high case, and, of course, those are not decided yet.

I appreciate it.

Thank you very much.

Thank you, Mr.

Khan.

Our next question comes from the line of Lasan Johong with RBC Capital Market.

You may proceed.

Thank you.

Congratulations Kent and Chris.

It couldn't have happened to more competent people.

That is great.

Peter, I think it's safe to say that given the guidance has been reaffirmed, that there is no danger or threat to a -- at least immediately anyway, danger or threat to cutting down the CapEx budget from the outline that was given earlier in the year?

Is that a question or a statement?

I'm asking to you confirm that if you don't mind, Peter.

I think we've outlined the guidance and our plans with respect to CapEx remain the same.

Okay.

Then is it also fair to say that as -- you had outlined that there were possibilities for additional CapEx spend over time in your presentation.

I'm assuming for now, given demand that that is off the table, is that correct?

But it might return with the growth coming back in California, is that a good assumption?

Well, I think we want to be clear and specific around this, and that is that we do have Cornerstone filings, so that is out there.

In the later stages of the planning horizon, we still have the British Columbia transmission line.

So we're continuing to work on that, and that would be an increment to it.

We have the Pacific Connector line that we're continuing to work on, and that's heading toward final FERC filing, and then as we discussed here, there's some other renewable opportunities that we continue to look at.

So I just want to remind everyone of those contingent items that are out there.

I think the situation remains pretty much the same from when we've spoken about those in the past.

What about your base CapEx spending?

I mean, is there no reduction in that base CapEx due to less demand, less wear and tear?

Well, where we stand in that regard is, we have the previous rate case that we filed and we're continuing along on the expenditures there, and the expenditure path that we've outlined in the past.

And then the outlook for capital expenditures going-forward are included in our NOI.

So we don't really see a change as you suggest.

Our rate case filing took into consideration the economic environment and our forecast based on that.

Do I'm not quite sure what you're getting at.

Chris has an additional point that he'd like to make.

What I would add to that is that, you know, I think if I hear it, you're getting at, there are changes in the economy that are impacting where we spend our capital.

So, for instance, we've seen the decline in some new customer, in housing starts if you will, and we had some capital set aside to address that.

But what that's done is, it's freed up that capital and enabled us to redeploy it.

As we talk about a lot, we have continual demands to replace aging infrastructure, upgrade our reliability in various parts of our service territory, and we've continued to see that side of that demand grow.

So we've redeployed in areas where we've been able to take advantage of the economy and the decline in something like new housing starts and redeploy that capital still within the rate structure that Peter outlined.

But enables us to continue to address the aging infrastructure and the reliability requirements.

We baked all of that into our needs as the next rate case comes along.

We don't anticipate that throughout that whole next rate case the economy would stay bad for the entire period, and so we do anticipate some rebound there, and some need to go back in and do address new housing starts.

That's perfect.

I want to follow up on Dan Eggers question.

The net effect of the bond index tying to the ROE is that you're going to have an 80 basis point increase in your ROE?

Potentially, that's what the mechanism tells you to date, it's a 12 month mechanism, I think we're ten months through it.

As I said before, we're going to make the decision when we get to the fall about how to approach that.

And that is a -- that's a one year item, that would only affect 2010.

That's when the mechanism is in place through 2010.

That would be 12.25 roughly?

12.15, I think if you added 80 basis points to our --

Is that going to cause you some political heartburn?

Well, that's one factor we're going to consider when we evaluate the filing over the next couple months.

And you don't have to do is it, right?

You don't have to take that increase?

Well, it's an automatic mechanism, so it's fairly mechanical, but we obviously have flexibility to work through it as we see fit.

Okay.

Thank you very much, appreciate it.

And Lasan, This is Gabe.

I'll remind everybody on the call that our guidance for 2010 is consistent with our current 11.35% ROE and is not contingent on a bump.

Thank you.

Thank you, Mr Johong.

Our next question comes from the line Michael Lapides with Goldman Sachs.

Conventional generation.

Can you give an update for the need for new conventional generation in California -- in your service territory, what's happening with some of the assets that you had originally contracted with, and what type of opportunities for potential rate based growth around conventional generation makes this over the next few years.

Michael, this is Chris.

As I think you may recall, we did file with the CPUC over a year ago on our requirements for the 2015 time frame for conventional generation.

And in that ruling, in that plan, plus the results of the previous plan, came out to be a need of around I guess 1100 to 1500 megawatts that we would have a need for for conventional generation by 2015.

We did a solicitation throughout last year, and we've been in the process of negotiating some of those proposals.

In fact, we even did a filing earlier, I guess a couple months ago, on the first one of those that came through that would be through a PPA type of agreement.

We do anticipate here in the next month or so being in a position to provide the CPUC with a filing on all of the rest of that solicitation and the results in our proposed solutions to those.

So we continue to see the need for new conventional generation in California, because we're seeing contracts that are going -- seeing other facilities that are aging, quite frankly and we want to make sure that there is new steel in the ground and that's what these generally have been aimed at.

so you will see and hear a little bit more about the results that here in the next several months.

Okay, and are all of these compared to a self-build option?

Well, the way the process works, the CPUC did not allow us to propose that we would build it ourselves and own that and we're still working through what that would look like for future times.

It really allowed for people to bid in, build the facility and sell us under a long term contract, the electricity from it, or they were allowed to bid in and propose to build the facility and sell us the facility.

And so we evaluate all of those and in fact, there's an independent evaluator that also participates in that.

Got it.

Okay, thank you.

Thank you, Mr Lapides.

Our next question comes from the line of Daniele Seitz with Dudack Research, you may proceed.

You mentioned tightening your belt, how much do you anticipate you can -- the type of savings you hope to achieve this year and next year?

Danielle, this is Kent.

We have not provided any estimates of what that is, but we have the experience in the first quarter with uncollectibles, and we decided that we'd go back and kind of work with all parts of our organization to try to identify some lower priority spend that we could capture some efficiencies for, and so we really expect to get that benefit in the second half of this year, and hope that we will be in place for the following year as well.

And so it will be both on the CapEx side as well as on the O&M expenses.

Or just O&M?

Our focus was more on the expense side this year.

Okay, and you will let us know next quarter?

Well, to the certainty it's a major factor, we would identify it.

Okay.

Okay.

Thank you,.

It will tend to be small items spread out through lots of different functions in our Company.

Okay.

Thank you.

Thank you, Miss Seitz.

Our next question comes from the line of Travis Miller with Morningstar.

You may proceed.

The way you guys read the house legislation, Waxman-Markey, what do you predict would be the impact on your customer's bills given the allowance structure that's set up in there?

Well, as you're probably pretty aware, we've been one of the cleanest utilities in the United States for many years.

In fact, based on owned generation, we emit about 6% of the average utility in the United States on the basis of owned plus contracted for, we emit about 50% of the average emissions of the average utility in the United States.

So the legislation provides for the allocation of allowances 50% on the basis of historical emissions, 50% on the basis -- so we believe that the impact on customer rates with the proposed legislation would be very moderate.

Still a moderate increase?

It would be pretty modest.

Okay.

Great, thanks a lot.

Thank you, Mr Miller.

Our next question comes from the line of of Ivana Ergovic with Jefferies.

You may proceed.

Hi, good morning.

My understanding is that Southern California and -- already got the approval to basically use its lower rating in determining the change in ROE in 2010.

I'm just wondering if there is any reason why would you think that you wouldn't be able to use the same logic.

We don't have complete clarity on this issue, so we just -- we don't know at this point.

Okay.

Thank you.

Thank you, Miss Ergovic.

Our next question comes from the line of Annie Tsao with Alliance Bernstein.

You may proceed.

Good morning, can you just go through the warrants?

I didn't hear very clearly.

And how is it going to work in the future?

These are warrants that -- Annie, this is Chris -- the state issued during their -- during this budget crisis, so rather than paying their electric bill on a current basis, they issued warrants, which is basically saying that they would pay us later, they're IOU's, if you will.

Now that they've got a signed agreement as to how they're going to resolve the budget, those warrants are due in October.

It was only $4.8 million for us, and we expected that they'll come through and pay that.

What happens if they can't pay it?

What's the situation then?

Well, ultimately, I'm not aware of any time that they haven't ever paid those, and -- but obviously in a hypothetical situation that they never paid, you know, the only ramifications we would have would be to file a suit against the state to get the cash back.

Thank you.

Thank you, Miss Tsao.

There are currently no additional questions waiting from the phone lines.

All right, I'll just thank everybody again for their interest and I'm sure we'll be seeing you at the couple of conferences that are coming up in September.

Thanks very much.